Confidence in claiming Inheritance Tax (IHT) Business Property Relief (BPR) in relation to holiday homes has been at a low ebb in recent years, following a string of cases that have ultimately gone against the taxpayer. However, in the recent case of Graham v HMRC ( UKFTT 0306 (TC)), the taxpayer was victorious. Has this decision turned the tide and is there anything that holiday home owners can take away for their own IHT planning?
In the case of Graham, the ‘holiday home’ consisted of four self-contained, self-catering holiday flats let out for 25 weeks of the year but with other onsite facilities including a pool, sauna, games room and well stocked garden. As usual, the case centred around whether the holiday home business was one which, as HMRC asserted, consisted, wholly or mainly, of holding an investment – this type of business does not qualify for BPR (section 105(3) IHTA 1984).
The case provides a useful review of key findings from previous case law, including the Court of Appeal cases of McCall and others v HMRC in 2009 and HMRC v George in 2004 and the Upper Tribunal cases of Pawson and Brander. In particular, Henderson J’s judgment in Pawson has made bringing successful claims very difficult due to some of the judge’s comments, including that ‘on the contrary, I consider [a holiday letting business] to be a typical example of a property letting business albeit of a fairly specialist nature’. This case was no different in emphasising again that ‘the active management of an investment does not prevent the business of holding it from being one of holding investments’. Arranging lettings, marketing the accommodation, and repairing and maintenance of the building or grounds are all part of exploiting a property investment.
In the present case, there was some discussion of the methodology of analysing these types of cases. The judge summed up the correct methodology to use (per 71) as looking at each component of the business and asking in relation to each whether any part of that component is the holding of investments, or not, and then stepping back to look at the whole picture. If, at the first stage, there is a component with a substantial investment element, the question is whether the other, non-investment, components outweigh it. He went on to say (at 73) that: ‘Some aspects of the business were in our view if considered on their own fairly clearly those of holding investments. There were other aspects which also fairly clearly did not fall into that category. And there were some which partook in various proportions of both descriptions. Our task is to look at the business in the round and to determine which aspects predominate’.
There has also been much debate in previous cases about the provision of additional services, such as organising events for the guests. Henderson J in Pawson quoted George in noting that the provision of services is ‘unlikely to be material’ because the services provided would not be enough to prevent the business remaining mainly a property letting business. In the present case, however, the judge suggested that providing additional services did have a role to play but the importance placed upon them is a matter of fact and degree. The ‘extent of additional services can be such that the preponderance of activity is not investment activity’ (per 79). For example, providing gardening services to keep a garden tidy supports the exploitation of the property for payment – an investment activity. However, in this case, the gardens were noted as being of exceptional quality and run along similar lines to a commercially exploited garden.
The judge compared the amount of time spent on additional services with time spent on the maintenance and management of the flats and between the provisions and activities usually found at a hotel with the arrangements on site at the flats. None of these appraisal methods proved conclusive as to whether the business was at the hotel end or the letting end of the spectrum. However, when comparing the services provided in this case with those provided in recent cases (Pawson, Green and Ross), the services provided were significantly more – ‘the pool, the sauna, the games room, the bikes, the food, the personal help and assistance. We did not regard these services as merely ancilliary to the use of the flat’ (per 90).
The judge acknowledged that it would only be an exceptional letting business which falls on the non-investment side of the line. However, the holiday letting run by the Graham family was just such an exceptional business ‘which does, just, fall on the non-mainly-investment side of the line....an intelligent businessman would in our view regard it as more like a family run hotel than a second home let out in the holidays’.
No doubt HMRC will be concerned about the number of other exceptional holiday letting businesses waiting in the wings to make a claim for BPR. If you are hoping that this won’t be appealed, don’t hold your breath.